Two news stories today concerning Ford caught my attention. The first concerned the departure of their President, Jim Padilla. He is credited with an earlier "turnaround" at Ford, but is stepping down now, and will not be replaced. The other story concerned Ford's pulling all of its professional golf-related advertising and promotion spending, to focus on another sport (the identity of which, frankly, has already passed from my mind).
These stories caused a flurry of discussion on CNBC's Squawkbox concerning Ford's current turnaround attempts. Hearing this, I pulled up a couple of stock performance charts for Ford and the S&P500 for the last 5 and 25 years, to ascertain the firm's total return consistency over those periods.
The recent 5 years look pretty ghastly, as I expected. Except for a brief period during 2003, the firm has underperformed the index throughout the period. For the entire timeframe, Ford underperformed the S&P500 by about 85 percentage points. It would appear to be a consistently inferior-performing firm for the last half-decade.
The picture for the past 25 years, however, is noticeably better. For the period from 1985-2000, Ford usually matched the index, and briefly outperformed it during 1986-1989. It also had a brief run of superior performance during the mid-1980s and early 1990s.
Taken together, the Ford situation leads me back to my earlier post about UAL, the preponderance of mediocre employees in many, if not most, large US companies, and long-term performance. How is it that so many firms lose competitive advantage, become complacent, and slip into mediocrity? Or worse, recent inferiority, as is the case with Ford.
It seems to me that a firm with the same name as the CEO's would be the least likely to suffer from a simple case of caretaker-CEO neglect. Ford has had a succession (although not unbroken) of family members running the company since its founding. If these guys are not motivated stay on top, and preserve their pride and fortune, who is?
I think the Ford performance picture shows us what is probably "natural" for an attentively-led firm. Even when the founding family is involved, a firm's fortunes wax and wane over time. Ford has had its periods of triumphs, such as the massive overhaul in the early 1980s. But even they became complacent, and by the early 1990s, had slipped in terms of total return performance.
By comparison, GM, for the same period, did much worse. On a percentage basis since roughly 1978, the S&P rose 1000%, Ford to near 250%, while GM slipped to a loss. Both companies reached a nadir of performance in the early 1980s, but whereas Ford took off to run with the index for most of 15-16 years, GM remained stuck with a nearly 0% total return for the entire period. Could this be the cost of disinterested, nameless CEOs paid handsomely, without risk, to run a large firm full of mediocre, dispassionate employees?
My hypothesis is precisely this. Left with a procession of bean-counters becoming well-paid CEOs, regardless of their successes or failures, GM has seen no performance cycles for over 20 years. Ford has.
Next, I'll offer some insights on why businesses seem to have to go through the same lessons and crises repeatedly, as we've seen in the cases of Ford and UAL.
Friday, April 07, 2006
Thursday, April 06, 2006
The Lucent-Alcatel Merger: Part 2
I discussed the Lucent takeover by Alcatel the other day in a post- no point in pretending it's a "merger" at this point.
Upon having a little more time today, I went to Yahoo and produced some total return charts for Lucent, Alcatel and the S&P500 index. The time periods I looked at were 5 and 14 years (9 for Lucent).
Not surprisingly, the total return chart for both firms over the last 5 years are nearly identical, and woefully underperforming the S&P nearly every year. Both had such a disastrous decline in 2001-02 that 2003 was better than average just because, evidently, they didn't go out of business. However, both companies have been consistently inferior performers.
For the longer periods, each company again significantly underperforms the S&P for the entire timeframe. While each temporarily outperformed the index for 1996-2000, this was, of course, a function of the double-counted and excessive demand for telecom equipment preceding the collapse of the late '90s tech boom. Each again experienced a brief period of outperformance during the reflexive snap-back of 2003-4, after losing 75% of their market value in a little over a year.
What is evident to me is that neither company is now, nor has ever been, a consistently superior-performing company among their large-cap peers. Even at their best, these companies simply filled orders, riding a swelling tide of demand, rather than intelligently managing their businesses for sustainable, long-term growth.
Given the sub-par performance of both companies, doesn't it make you wonder why so much air time and/or ink is being spent on this combination? And why nobody seems to be asking how Pat Russo, based upon her dismal track record running Lucent, could possibly take the combined firm somewhere, performance-wise, neither company has ever been before?
Upon having a little more time today, I went to Yahoo and produced some total return charts for Lucent, Alcatel and the S&P500 index. The time periods I looked at were 5 and 14 years (9 for Lucent).
Not surprisingly, the total return chart for both firms over the last 5 years are nearly identical, and woefully underperforming the S&P nearly every year. Both had such a disastrous decline in 2001-02 that 2003 was better than average just because, evidently, they didn't go out of business. However, both companies have been consistently inferior performers.
For the longer periods, each company again significantly underperforms the S&P for the entire timeframe. While each temporarily outperformed the index for 1996-2000, this was, of course, a function of the double-counted and excessive demand for telecom equipment preceding the collapse of the late '90s tech boom. Each again experienced a brief period of outperformance during the reflexive snap-back of 2003-4, after losing 75% of their market value in a little over a year.
What is evident to me is that neither company is now, nor has ever been, a consistently superior-performing company among their large-cap peers. Even at their best, these companies simply filled orders, riding a swelling tide of demand, rather than intelligently managing their businesses for sustainable, long-term growth.
Given the sub-par performance of both companies, doesn't it make you wonder why so much air time and/or ink is being spent on this combination? And why nobody seems to be asking how Pat Russo, based upon her dismal track record running Lucent, could possibly take the combined firm somewhere, performance-wise, neither company has ever been before?
The "Urge to Merge"
CNBC has been celebrating merger activity this week on their Squawkbox morning program. Their so-called economics guru, Steve Leisman, presented a summary of some old and new academic M&A research the other day. It told the expected story, for anyone who has studied this area at all, that most large, publicly-held company mergers and acquisitions destroy value for the acquirer. Some relatively obscure finance assistant professor from a second-tier school was interviewed regarding her recent study, and it pretty much sustained the work of 30 years ago.
Apparently, CNBC feels that recent trend in the volumes of M&A indicated a heightened "urge to merge." The reason opined for this was basically stronger stock prices provided an overvalued currency with which large companies can take out competitors, quickly grab needed pieces of their evolving business model, or simply spend the overvalued currency while it's buying power is so great.What I found provocative was Leisman's question, 'are companies doing any better making these combinations work?' The answer from the academic was, essentially, "no."That's also not surprising to me. In fact, I would guess that the value destruction percentages would be fairly stable over time as well. However, I would guess that, aside from the last reason for the increased volume of M&A deals recently, there are two other reasons.The first, in my opinion, is the increasing cost of mediocrity to large organizations. As I wrote in my last post, and will expand upon in future posts, mediocrity is a necessary companion to the modern large company. Such mediocrity means that most companies are in a position of being unable to develop, competently, themselves, what they can occasionally buy more easily in the form of another public company.
I think a different, but related, reason is the role of business technology in today's world. The rate of growth of a successfully-launched business concept today is probably unprecedented, even in America's fast-changing economic environment. Thus, as deep and liquid capital markets, plentiful outsourcing opportunities, and various technological resources are available, a new company can become a viable threat to an old, mediocre one much faster now than it probably could have, say, even 10 years ago.
With this kind of advantage to the newer entrants in a market, it's not surprising to me that more large companies are rushing to buy what they may not have time to build effectively. It causes me to have this image of a herd of large, old elephants being surrounded by packs of cheetahs, tigers and lions.
For example, Blockbuster, founded in 1982, is now being eviscerated by Netflix, founded in 1997. The stock price charts of the two, after Netflix's arrival nine years ago, are close to mirror images.
This is the sort of fear-inducing situation I can see accelerating acquisition activity at many large firms. Any guess as to how much longer Netflix has before a flood of web-based digital-on-demand sites gut its business model?
Apparently, CNBC feels that recent trend in the volumes of M&A indicated a heightened "urge to merge." The reason opined for this was basically stronger stock prices provided an overvalued currency with which large companies can take out competitors, quickly grab needed pieces of their evolving business model, or simply spend the overvalued currency while it's buying power is so great.What I found provocative was Leisman's question, 'are companies doing any better making these combinations work?' The answer from the academic was, essentially, "no."That's also not surprising to me. In fact, I would guess that the value destruction percentages would be fairly stable over time as well. However, I would guess that, aside from the last reason for the increased volume of M&A deals recently, there are two other reasons.The first, in my opinion, is the increasing cost of mediocrity to large organizations. As I wrote in my last post, and will expand upon in future posts, mediocrity is a necessary companion to the modern large company. Such mediocrity means that most companies are in a position of being unable to develop, competently, themselves, what they can occasionally buy more easily in the form of another public company.
I think a different, but related, reason is the role of business technology in today's world. The rate of growth of a successfully-launched business concept today is probably unprecedented, even in America's fast-changing economic environment. Thus, as deep and liquid capital markets, plentiful outsourcing opportunities, and various technological resources are available, a new company can become a viable threat to an old, mediocre one much faster now than it probably could have, say, even 10 years ago.
With this kind of advantage to the newer entrants in a market, it's not surprising to me that more large companies are rushing to buy what they may not have time to build effectively. It causes me to have this image of a herd of large, old elephants being surrounded by packs of cheetahs, tigers and lions.
For example, Blockbuster, founded in 1982, is now being eviscerated by Netflix, founded in 1997. The stock price charts of the two, after Netflix's arrival nine years ago, are close to mirror images.
This is the sort of fear-inducing situation I can see accelerating acquisition activity at many large firms. Any guess as to how much longer Netflix has before a flood of web-based digital-on-demand sites gut its business model?
Tuesday, April 04, 2006
UAL "Best Practices"
The Wall Street Journal carried a rather breezy piece last week describing how United Air Lines is now sending its ramp crews to "Nascar U" for training to work as a team in turning around a race car in the pits. The idea is to discover and train teams in "best practices" for turning airliners around on the gate ramps. Incredibly, according to the article, UAL training for this has always been "optional," and the FAA has been displeased to find procedural differences among cities in which UAL operates.
What strikes me as so odd about this story are the following.
First, wouldn't you think a major airline would have studied, benchmarked and applied best practices to something as crucial and frequent as airliner serving at the gate by now? Hasn't UAL been through at least one bancruptcy, and several CEOs, trying to become more financially successful? Would you not think that functions like this would have been among the first to have been studied, improved and standardized by a competent management?
I worked for the predecessor to Accenture, Ltd, the old Andersen Consulting, in the 1990s. Even back then, they were flogging "best practices" mercilessly in virtually every sector and function they could cover. How could an airline as large as UAL not have been besieged by Andersen-cum-Accenture, and/or its many competitors, to submit something so key as operationally turning airliners around on the ground between flights, to "best practices" studies?
Second, what does this WSJ story indicate about the ability of a large, modern corporation to simply get the basics right in its operations? How could such sloppy, undisciplined management and implementation exist in one of the largest companies in such a visible sector?
My partner and I discussed this at length a few days ago, as we typically talk about noteworthy business news of the past week after playing squash. What emerged was conceptual framework I am confident you won't find at any leading business school (and we each matriculated at one of the best). The initial element of it is as follows.
Essentially, I think that widespread mediocrity is a necessary consequence of a successful capitalistic economic system. As a capitalistic system allows innovative leaders to emerge and succeed with their enterprises, those enterprises paradoxically employ many mediocre people who, by themselves, would have difficulty creating as much value alone as they do when employed by a successful capitalist.
To see this more clearly, think of a similar situation from our species' past. When we were primitive hunters, don't you think the best hunter, and his family, were better-fed and bred larger families, than other hunters with less skill? Back then, the lesser-skilled would suffer more drastic consequences such as starvation, and lack of genetic survival. Perhaps even then, the less-skilled homo sapiens followed the more-skilled, who might have consequentially emerged as early leaders of such primitive "enterprises."
However, with the rise of civilized societies, and capitalism, people who may not have even survived in an earlier time now can find average jobs, wear suits to work, and live "normal" lives. When you pack large, modern companies with a preponderance of these "followers," you're not going to get many nimble, consistently-superior-performing companies.
Instead, I think you're going to get a lot of UALs. Companies in which the best ideas don't propagate throughout the firm. And this will be the norm, because, thanks to modern civilization, there is a viable safety net for the average person. It's my guess that, in a "knowledge" economy, the value foregone by having mediocre people in most positions is probably far greater than it is in a primarily industrial economy.
Add a hefty dose of our current technological change, and it's a wonder that even the best CEOs can overcome this kind of inertia. Even with an army of consultants begging to study and implement "best practices." The consultants will study and leave, but the mediocre employees remain to function "normally."
This insight has led me to several conclusions that I will be discussing in coming posts. Suffice to say, they reinforce the basic conclusions of the research that drives my equity portfolio management process: consistently superior performance is rare and fleeting, even for the best-led companies in the most opportune product/markets. And consistent success only leads to longer and longer odds of continuing that success, no matter how good the leadership of the company.
What strikes me as so odd about this story are the following.
First, wouldn't you think a major airline would have studied, benchmarked and applied best practices to something as crucial and frequent as airliner serving at the gate by now? Hasn't UAL been through at least one bancruptcy, and several CEOs, trying to become more financially successful? Would you not think that functions like this would have been among the first to have been studied, improved and standardized by a competent management?
I worked for the predecessor to Accenture, Ltd, the old Andersen Consulting, in the 1990s. Even back then, they were flogging "best practices" mercilessly in virtually every sector and function they could cover. How could an airline as large as UAL not have been besieged by Andersen-cum-Accenture, and/or its many competitors, to submit something so key as operationally turning airliners around on the ground between flights, to "best practices" studies?
Second, what does this WSJ story indicate about the ability of a large, modern corporation to simply get the basics right in its operations? How could such sloppy, undisciplined management and implementation exist in one of the largest companies in such a visible sector?
My partner and I discussed this at length a few days ago, as we typically talk about noteworthy business news of the past week after playing squash. What emerged was conceptual framework I am confident you won't find at any leading business school (and we each matriculated at one of the best). The initial element of it is as follows.
Essentially, I think that widespread mediocrity is a necessary consequence of a successful capitalistic economic system. As a capitalistic system allows innovative leaders to emerge and succeed with their enterprises, those enterprises paradoxically employ many mediocre people who, by themselves, would have difficulty creating as much value alone as they do when employed by a successful capitalist.
To see this more clearly, think of a similar situation from our species' past. When we were primitive hunters, don't you think the best hunter, and his family, were better-fed and bred larger families, than other hunters with less skill? Back then, the lesser-skilled would suffer more drastic consequences such as starvation, and lack of genetic survival. Perhaps even then, the less-skilled homo sapiens followed the more-skilled, who might have consequentially emerged as early leaders of such primitive "enterprises."
However, with the rise of civilized societies, and capitalism, people who may not have even survived in an earlier time now can find average jobs, wear suits to work, and live "normal" lives. When you pack large, modern companies with a preponderance of these "followers," you're not going to get many nimble, consistently-superior-performing companies.
Instead, I think you're going to get a lot of UALs. Companies in which the best ideas don't propagate throughout the firm. And this will be the norm, because, thanks to modern civilization, there is a viable safety net for the average person. It's my guess that, in a "knowledge" economy, the value foregone by having mediocre people in most positions is probably far greater than it is in a primarily industrial economy.
Add a hefty dose of our current technological change, and it's a wonder that even the best CEOs can overcome this kind of inertia. Even with an army of consultants begging to study and implement "best practices." The consultants will study and leave, but the mediocre employees remain to function "normally."
This insight has led me to several conclusions that I will be discussing in coming posts. Suffice to say, they reinforce the basic conclusions of the research that drives my equity portfolio management process: consistently superior performance is rare and fleeting, even for the best-led companies in the most opportune product/markets. And consistent success only leads to longer and longer odds of continuing that success, no matter how good the leadership of the company.
Monday, April 03, 2006
The Failure At Lucent
This weekend's announcement of Lucent's "merger" with Alcatel has brought forth a flurry of commentary and analysis by the business news and entertainment media today. Most of it seemed to focus on two topics: the prospects of success for the combination, and Pat Russo becoming France's first female CEO.
Both topics seem, to me, much simpler than they are being made out to be in the media.
First, let me state that I have never bought Lucent for my portfolio. While it was a high flying growth stock upon its IPO, it came down to earth long before it would have qualified as a consistently superior performer for inclusion in my portfolio. Suffice to say, I see its eventual collapse and, now, rescue via merger, as a testament to the validity of the research and philosophy underlying my equity portfolio strategy.
Regarding the combination of firms, I think you can safely say that Lucent is being taken over, but not "bought," per se, by Alcatel. As frequently occurs in this sort of deal, it's called a merger, and the weaker firm's CEO is often given the resulting CEO position, to placate investors and employees of that firm. However, since the resulting company is clearly being called "French," this, I think, leaves little doubt as to which of the two firms will, in fact, exercise the greater influence in the future.
Next, we come to Pat Russo. What better situation for the French at Alcatel to create than giving Ms. Russo the titular honor of being the "first woman CEO" of a French firm? It's already been widely pre-announced that lots of riot-causing layoffs will be required. Who better to blame than this vanguard of the French boardrooms?
Does anyone honestly think that, with Alcatel controlling the combination, and probably dominating the resulting senior staff, giving Russo the CEO job is meant as anything more than providing a sacrificial lamb? It's my guess that in a year or so, things won't be working out as expected, Russo's cultural differences will be blamed, and she will "retire to pursue other interests." Alcatel's management will be able to get back to business their way, without the distractions of American interlopers in the C-suite.
By the way, who really thinks the CEO of either of these limping telecom vendors deserves to be running the combined firm? Russo can hardly be said to have succeed in leading Lucent to success. Does it really seem likely that either CEO can succeed in leading the resulting firm to consistently superior returns in the next few years as a high-growth company? A place neither seems to have visited recently?
Both topics seem, to me, much simpler than they are being made out to be in the media.
First, let me state that I have never bought Lucent for my portfolio. While it was a high flying growth stock upon its IPO, it came down to earth long before it would have qualified as a consistently superior performer for inclusion in my portfolio. Suffice to say, I see its eventual collapse and, now, rescue via merger, as a testament to the validity of the research and philosophy underlying my equity portfolio strategy.
Regarding the combination of firms, I think you can safely say that Lucent is being taken over, but not "bought," per se, by Alcatel. As frequently occurs in this sort of deal, it's called a merger, and the weaker firm's CEO is often given the resulting CEO position, to placate investors and employees of that firm. However, since the resulting company is clearly being called "French," this, I think, leaves little doubt as to which of the two firms will, in fact, exercise the greater influence in the future.
Next, we come to Pat Russo. What better situation for the French at Alcatel to create than giving Ms. Russo the titular honor of being the "first woman CEO" of a French firm? It's already been widely pre-announced that lots of riot-causing layoffs will be required. Who better to blame than this vanguard of the French boardrooms?
Does anyone honestly think that, with Alcatel controlling the combination, and probably dominating the resulting senior staff, giving Russo the CEO job is meant as anything more than providing a sacrificial lamb? It's my guess that in a year or so, things won't be working out as expected, Russo's cultural differences will be blamed, and she will "retire to pursue other interests." Alcatel's management will be able to get back to business their way, without the distractions of American interlopers in the C-suite.
By the way, who really thinks the CEO of either of these limping telecom vendors deserves to be running the combined firm? Russo can hardly be said to have succeed in leading Lucent to success. Does it really seem likely that either CEO can succeed in leading the resulting firm to consistently superior returns in the next few years as a high-growth company? A place neither seems to have visited recently?
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